Post navigation

Given the odds, is taking venture capital the best way to get rich?

align with the VCs to grow the business as best you can with the firm target of an exit

hold on to enough equity so that when the exit comes you and the VCs both get rich

maybe some of your employees hang on to enough equity that they get rich too

retire on your boat

It’s a reasonable fantasy. I get it. In a recent post we discussed the difficulty for founders in holding on to equity and control in their own companies once they involve venture capitalists. And as you can imagine, if it’s hard for founders to hang on to equity, then employees have an even slimmer chance. But what about the money?

I tend to not factor in the money that you get from the mythical huge exit because they’re so rare. But what kind of money can you expect to earn in terms of profit?

A couple of blog posts have gone around citing profit per employee figures from 2008. This one and this one.

Some tidbits:

Revenue and profit per employee in 2008 (in USD)

Company

Employees

Revenue per employee

Profit per employee

Google

20,164

1,080,914

209,624

Microsoft

91,000

663,956

194,297

Baidu

6,397

499,961

163,844

Apple

32,000

1,014,969

151,063

Cisco

66,129

597,922

121,762

Adobe

7,335

488,056

118,856

eBay

16,200

527,238

109,844

Intel

82,500

455,588

64,145

Oracle

86,657

258,837

63,711

Dell

76,500

798,706

32,392

Amazon

20,600

930,388

31,311

Yahoo

13,600

530,037

31,199

IBM

398,455

260,080

30,957

HP

321,000

368,735

25,947

Sun

33,556

413,637

12,010

Now I’m not saying making 200k in profit per year per employee is an easy feat. And frankly, even making the 12k that Sun has made is an accomplishment in my opinion. But I do know this, making 200k in profit per employee is a lot easier when you five or ten employees than when you have 20,164 like Google does in the chart. Even getting to 100k per profit per FTE will help you kick Oracle, Amazon, and Dell’s asses.

Now, critics will point out that that profit per that many FTEs ends up being quite a bit of money. And that’s fair. Except for one small problem. How much of that profit ends up in the hands of the hands of founders? Well, it depends. It’s often a surprisingly small amount. Remember, these founders often (not always) end up without huge percentages of their businesses.

I believe that profit per FTE is one of the single most important metrics there can be in a business. And I hope someday to get our number to very high. The main difference is that I hope to make that number high not only by earning lots of revenue, but by aggressively keeping the number of employees it has to be divided by as small as possible. And since there will be no investors, there are only two remaining constituencies to split the money between: employee-owners and employees. If I can pull 500k a year out of my business, it’s like I have 10 million dollars in the bank.

The astute (and even not so astute) may point out that for my 10 mil equivalent I have to keep working. Fair enough. I don’t get it in one lump sum. However, so many entrepreneurs tell me how they love working and will be doing it the rest of their lives. So why not do it the rest of your life, pull the cash out of your business with lots of profit and very few employees, and ultimately retain significant control over your own destiny?

I could have done better at math, but I need some help designing an equation that includes all these factors:

chance of your idea taking off

chance of you retaining control while your idea takes off

chance of you retaining enough ownership to make money when your idea takes off

chance of your company getting to a liquidity event

chance of your business becoming profitable year-over-year

amount of profit your business generates

number of people who have the right to some of that profit

likely amount of money you’ll get in such a liquidity event

likely amount of money you’ll be able to pull out of the business each year

number of years it will take for the money you pull out of the business to equal the amount you’d get in a liquidity event

likely number of years you’ll have to work to create a business that reaches a liquidity event

You get the point. I think I need to hire Umair Haque to figure out how to turn this into an apples to apples comparison.

To me, taking that longshot at a venture backed liquidity event that leaves you with enough money to be rich is akin to playing the lottery. But building your own business that you control feels a lot more like the ideal of entrepreneurship that many people claim to espouse. And I claim, that in the latter case, not only can your odds of succeeding be higher, but when you do succeed, instead of having won the lottery, you’ve created your own personal cash printing press. Cash that you can use as if it were dividends from some big payout, or that you can reinvest in new projects to scratch your entrepreneurial itch. And in our future, hopefully, both!

As usual, I have no problem with the VC –> “liquidity event” standard path. But I am fascinated by people who think that it’s the only path to creating a “real” business or “real” wealth. I am always genuinely surprised by how many people take the VC path, especially for businesses that don’t seem to require it. It feels to me like they’re choosing to take the low percentage shot. But maybe I’m missing something.

9 Responses to Given the odds, is taking venture capital the best way to get rich?

Amen. I founded two companies (not enough for a good sample, but…) With the first, we took venture capital. Taking VC made our lives easier in the process. We took nice salaries, vacations, etc. But it failed. And in a pretty painful way (part of taking venture capital is ramping up to large numbers of employees; less fun when you have to lay them off).

The second was mostly bootstrapped (I took a little angel money from some people we knew). We were acquired. For less than $10M, but nonetheless, enough to be happy with the outcome. I now have a small business that generates some cashflow without too much involvement on my part.

The big secret: The first million changes your life. The second doesn’t. I suspect $100M isn’t that different from $1M. So why take on that kind of risk?

What if you won’t survive without VC money?
What if the competition is faster because they take VC?
What if the competition has more opportunities because of the connections of VC?
If you can build a business the provides you with 500k pa for the rest of your life, congratulations. But how high are the chances that you business will be around for such a long time – especially if you happen to be a tech startup?

I would imagine specific businesses need to “fast track” their development to beat competitors. Outside angel/venture money helps make this happen by allowing a startup to attract effective talent. Nowadays it is much more possible to start out with just your spare time and a few grand for legal expenses to get the company breathing, but if you look at the largest and most successful companies you’ll see that there was a method for attracting outside talent in sufficient quantities to tip the industry in their favor.

It’s the VC anti-dilution and liquidation preferences that make moderate exits (the most likely scenario) a bust for the common shareholders (founders and employees). And, since VCs need a liquidation they will never let you distro cash as you have described. You can point to past successes and see the role that VC money played but that’s a trailing indicator. For most web/tech/social companies of the present (and future) more modest capital raises and practical liquidity models utilizing angel money will drive the best outcomes for the team.

Big props to Hans Solo too, for coming out his Carbonite deep freeze and laying some of his wisdom on us. :)

WRT Erik’s comment, I think this is a classic misreading of Hillel’s argument. He’s not saying that you can make a business work on no capital. And he’s not saying that all business require the same amount of capital. If you have a business that requires large amounts of capital to be successful, then you probably DO HAVE TO look into capital sources like VC.

But I would say that as it relates to web software, more and more businesses are able to be created on smaller and smaller amounts of capital. There’s a great deal of evidence to support this perspective.

One important variable is that with VC, you’re playing with Other People’s Property. If you have an idea that requires a few years to break even and a few people to work on it, you can risk a half mil of your own money (assuming you’re independently wealthy) or you can do it on someone else’s dime. If it fails, you’ve drawn a salary for doing something fun; if it succeeds, you get to share in the upside.

You compare taking VC to playing the lottery. That’s fair in many ways. But you say: “I tend to not factor in the money that you get from the mythical huge exit because they’re so rare.” While uncommon, those results are so huge that they do play an important part in the expected returns calculation – just like in the lottery.

Finally, let me point out that you’ve built a wonderful services company that is, I think, moving towards building products. As compared to product companies, service companies are generally much faster to get to cashflow breakeven and not venture backed. These points are correlated. It’s inherently riskier and more expensive to start a company that builds products because you don’t have a customer who’s promised to pay you for your work. Exceptions abound, but it’s a useful starting point to “should I consider VC”. If one of your goals is to build a product, the answer is more likely yes than if your answer is to serve really delicious vegan desserts, for example.